Chapter 7: Incremental Analsysis

Question 1

Opportunity Cost:

Answer 1

Maximum amount of profit foregone by not using a limited
resource in its best alternative use

Question 2

Differential/Incremental cost

Answer 2

Difference in cost under two alternatives.

Question 3

Outlay Cost:

Answer 3

Cost that requires a cash disbursement.

anything you are buying!!!

Question 4

how is info relevant and useful?

Answer 4

Two criteria information to be relevant:
1. Affects future cash flows
2. Differs amongst competing alternatives

• Exception: Opportunity cost is always relevant if it exists

Question 5

Sunk Costs and SUnk Revenues@

Accumulated Depreciation or Depreciation Expense

NBV or Carrying amount

Selling an asset:

Dr. Accumulated Depreciation
Cr. Asset

Answer 5

ALL irrelevant

Question 6

Dr. Cash = Relevant
Cr. Loss or Gain on Sale = Irrelevant

Answer 6

cash is relevant!!!

Question 7

Incremental cash inflows
vs.
(Incremental cash outflows + Opportunity cost)

Answer 7

> Accept

< Reject

= Indifferent

Question 8

Insourcing vs. Outsourcing

Answer 8

Cost to make: Incremental Cash Outlay + Opportunity Cost

Cost to buy: External purchase price